It Might Not Be A Great Idea To Buy Digi.Com Berhad (KLSE:DIGI) For Its Next Dividend

Digi.Com Berhad (KLSE:DIGI) is about to trade ex-dividend in the next 3 days. You can purchase shares before the 26th of February in order to receive the dividend, which the company will pay on the 26th of March.

Digi.Com Berhad's next dividend payment will be RM0.036 per share. Last year, in total, the company distributed RM0.16 to shareholders. Last year's total dividend payments show that Digi.Com Berhad has a trailing yield of 4.2% on the current share price of MYR3.74. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Digi.Com Berhad

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, Digi.Com Berhad paid out 99% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. A useful secondary check can be to evaluate whether Digi.Com Berhad generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (75%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's good to see that while Digi.Com Berhad's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Digi.Com Berhad's earnings per share have dropped 6.7% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Digi.Com Berhad has seen its dividend decline 3.2% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Is Digi.Com Berhad an attractive dividend stock, or better left on the shelf? It's never fun to see a company's earnings per share in retreat. Worse, Digi.Com Berhad's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Digi.Com Berhad and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 2 warning signs for Digi.Com Berhad (1 shouldn't be ignored!) that deserve your attention before investing in the shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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